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Plaintiff leased motor vehicles to the U.S. Government, and the Board imposed sales and use taxes on the leases. Plaintiff filed an action in federal court to enjoin the collection of the state taxes. The U.S. District Court dismissed the action.

The Ninth Circuit U.S. Court of Appeals affirmed, holding that the federal Tax Injunction Act, 28 U.S.C. Section 1341, bars the federal courts from enjoining the collection of state taxes where the taxpayer has a plain, speedy, and efficient remedy in state courts. The taxpayer in the instant case had such a remedy because it could have paid the taxes and sought a refund in state court. Thus, the Tax Injunction Act bars this action despite plaintiff's claim that it did not have sufficient assets to pay the taxes.

The court also held that the federal district court did not have ancillary jurisdiction over this action as a result of United States v. California State Board of Equalization (1981) 650 F.2d 1127 (Ninth Circuit), aff'd 456 U.S. 901 (1982), in which the court held that taxes on certain leases to the United States were unconstitutional. The United States was not a party to this action, and there was not an identity of interest between taxpayer and the United States to allow taxpayer to assert the federal interest in federal court. Redding Ford v. State Board of Equalization (1983) 722 F.2d 496 (9th Cir. 1983), cert den. (1984) 469 U.S. 817.

Classification of Shopping Guide as Taxable Publication Was Constitutional

Appellants were the printers and publisher of a shopping guide distributed without charge in Humboldt County. More than 90 percent of the shopping guide consisted of advertising. Sales and Use Tax Regulation 1590 provides that a nontaxable periodical does not include shopping guides or other publications of which 90 percent or more consists of advertising. Appellants contended that the Regulation 1590 classification of advertising publications as taxable was an infringement on freedom of speech, was a denial of equal protection, and was unauthorized by the Legislature.

The court of appeal held in favor of the Board. The court held that commercial speech was not entitled to the same degree of First Amendment protection as noncommercial speech, and that differential tax treatment of advertising publications was not content-based discrimination prohibited by the First Amendment.

The court also held that Regulation 1590 did not deny equal protection to the appellants. The regulation did not restrict or regulate in any manner their right to engage in commercial speech, but rather merely withheld from them a tax subsidy. Since the Legislature sought to subsidize and encourage publications which disseminate valuable and timely news and information, the Board could rationally conclude that publications which are mere conduits for advertising do not fit within the objective sought to be achieved by the tax exemption for newspapers and periodicals.

The court also held that Regulation 1590 did not exceed the Board's authority to adopt regulations to implement the Sales and Use Tax Law. It did not arbitrarily classify newspapers and periodicals, but instead only gave substantial meaning to the terms as they are used in Revenue and Taxation Code Section 6362. This interpretation was necessary in order to differentiate those publications from other printed matter subject to tax. The presence of advertising as a basis for the distinction was a reasonable classification method, and is also used by the U.S. Postal Service for the second class mailing privileges of periodicals. Redwood Empire Publishing Co. v. State Board of Equalization (1989) 207 Cal.App.3d 1334.

Standard of Proof of Tax Fraud Is Clear and Convincing Evidence

A bankruptcy court upheld the Board's claim for civil tax fraud against a debtor, based on a preponderance of the evidence. The bankruptcy court held that the California Supreme Court decision in Liodas v. Sahadi (1977) 19 Cal.3d 278, established that standard of proof in civil fraud cases. A U.S. district court affirmed the bankruptcy court.

On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed the bankruptcy court. The court predicted that the California standard of proof for civil tax fraud would be clear and convincing evidence. The court based its decision on Marchica v. State Board of Equalization (1951) 107 Cal.4th 501, and Board administrative decisions in franchise and income tax appeals. Although Marchica was an earlier decision by a court of appeal, and Liodas was a later decision by the California Supreme Court, the Liodas decision did not overrule or mention Marchica, and dealt with civil fraud generally, not civil tax fraud specifically. In re Renovizor's, Inc. (9th Cir. 2002) 282 F.3d 1233.

Taxpayer furnished and installed signs pursuant to construction contracts. He contested the Board's conclusion that the signs were fixtures under Regulation 1521. The court held that the Board had properly applied Regulation 1521 in determining that the signs at issue were fixtures. Richard Boyd Industries, Inc. v. State Board of Equalization (2001) 89 Cal.App.4th 706.

The Imposition of a Sales Tax by the San Diego County Regional Justice Facility Financing Agency After Approval of the Tax by a Simple Majority of the Voters Violated Proposition 13

In 1987 the Legislature passed an act creating the San Diego County Regional Justice Facility Financing Agency. The Agency was charged with adopting a tax ordinance imposing a supplemental sales tax of one-half of 1 percent throughout San Diego County for the purpose of financing the construction of justice facilities. At an election held in June 1988, the County's voters approved the tax ordinance by 50.8 percent. The plaintiffs challenged the validity of the tax, asserting that it violated the supermajority requirements of Proposition 13 for special taxes imposed by special districts.

The Supreme Court held that a "special district" includes any local taxing agency created to raise funds for city or county purposes to replace revenues lost by reason of Proposition 13. Since the Agency was created to raise funds for county purposes and thereby circumvent Proposition 13, it was a special district.

The court further held that the sales tax was a "special tax" which it defined as a tax levied to fund a specific governmental project or program, such as the construction and financing of the County's justice facilities.

Since the Agency was a special district and the sales tax it imposed was a special tax, the imposition of the tax violated Proposition 13 which requires approval of the tax by at least two-thirds of the voters. Rider v. County of San Diego (1991) 1 Cal.4th 1.

Board Has Authority to Assert Tax Based on Information Other than Books and Records of Taxpayer, and Taxpayer then Has Burden of Proof to Show that Board's Audit Is Incorrect

Plaintiff was engaged in business as a tavern keeper and timely filed sales and use tax returns with the Board. The Board conducted an audit of plaintiff on the basis that of the liquor purchased by plaintiff, certain amounts were used in drinks that were sold and certain amounts were wasted or consumed without being sold. The Board thus computed taxable sales in excess of those shown in plaintiff's books and records. Plaintiff paid the tax asserted and sued for refund on the basis that it maintained all the books and records required by law and that they were in agreement with each other.

The court of appeal held that the Board was not required to accept as conclusive evidence the taxpayer's books and records, even though these were in agreement with each other, where the Board, using recognized and standard accounting procedures, established in an audit that the books and records did not disclose the correct amount of tax liability. The court further held that where the Board has established a deficiency, the burden of proof is upon the taxpayer to explain the disparity between the taxpayer's books and records and the results of the Board's audit. Riley B's, Inc. v. State Board of Equalization (1976) 61 Cal.App.3d 610.

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